QE3 to Open Up New Investment Opportunities
Last week's Fed statement was a little more forthcoming than normal…
Chairman Ben S. Bernanke said The Federal Reserve is considering additional asset purchases to boost growth after extending its pledge to keep interest rates low through at least late 2014.
"The Committee expects to maintain a highly accommodative stance for monetary policy," the FOMC said in a statement. "Economic conditions - including low rates of resource utilization and a subdued outlook for inflation over the medium run - are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014."
The FOMC statement went on to say that policy makers are "prepared to provide further monetary accommodation if employment is not making sufficient progress towards our assessment of its maximum level, or if inflation shows signs of moving further below its mandate-consistent rate."
It seems the table is being set for QE3 in the very near future because this statement steered away from growth – contrary to past reports.
Fed Not So Bullish on the U.S. Economy
Here's what has the Fed worried:
- Growth estimates have been lowered for 2012 and beyond. The Fed lowered its forecast for growth this year to 2.2% to 2.7%, down from a projection of 2.5% to 2.9% in November. It predicted the economy will expand 2.8% to 3.2% next year, down from a previous forecast of 3.0% to 3.5%.
- The Fed's projected range of 8.2% to 8.5% means it doesn't expect the unemployment rate to get much better this year. Even by 2014, the Fed expects this rate to have improved only to between 6.7% and 7.6%.
Inflation Not Expected to Rise
The Fed also offered an official target for consumer price inflation – 2% a year – the level that was long considered the Central Bank's implicit goal. The Fed's congressional mandate includes maintaining rough price stability, allowing neither runaway inflation nor a potentially devastating cycle of deflation that could push investors and consumers out of the market:
"Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability," the panel said in a statement. It also enhances "the committee's ability to promote maximum employment in the face of significant economic disturbances."
Where Will the Money Go?
Look to the BRICs. The already-emerged markets of China and Russia should do quite well.
"QE3 is very, very good for emerging markets because it means there's lots of cash in the system," says Mark Mobius, who oversees about $40 billion as Executive Chairman of Templeton's Emerging Markets Group, said in a phone interview from Bangkok on Jan. 27. "I would expect more institutional flows into stocks, generally, and of course, emerging markets as well."
Valuations in developing nation stocks are "attractive, almost globally," Mobius said. He continued on to say "rallies should continue" as markets have "already anticipated" a global economic slowdown. "Emerging markets, even this year, are growing at four times that of developed countries."